Here's What Happens When You Cash Out a CD Before It Matures

You can open a certificate of deposit (CD) with the best of intentions. The thinking at the time is that you will leave your money untouched for a certain time period, and earn a steady predictable return.

But sometimes life has other plans. Emergencies pop up, or your priorities shift and suddenly you might need to access that money ASAP. Usually there's a fee involved to withdraw early from a CD, but is it worth it?

Here's what you need to know, and options to avoid early withdrawals.

What are the penalties for cashing out a CD early?

CDs come with a maturity date -- usually anywhere from a few months to five years or more. While you can pull your money out before then, most banks will hit you with an early withdrawal penalty.

Each bank sets its own rules for penalties, but here's an example from Wells Fargo:

• CD terms less than 3-months: You'll lose 1 month's worth of interest.
• CD terms 3- to 12-months: You'll forfeit 3 months of interest.
• CDs between 12-24 months: The penalty jumps to 6 months of interest.
• Any CD longer than 24-months: You'll lose 12 months of interest.

And this isn't a partial penalty. Most banks don't allow partial withdrawals so if you only need $500 from a $5,000 CD, you'd likely need to withdraw the full balance. Which means paying the full interest penalty.

So that $500 emergency could end up costing you a lot more than you planned.

How to avoid penalties for cashing out a CD early

If you're not totally sure you can commit your money to a CD's full term, that's totally fine. There are ways to hedge.

One way is to simply choose a shorter term than what you initially might think. For instance, a 6-month CD instead of a 12-month one gives you quicker access with less commitment.

Another option is to build a CD ladder. For example, let's say you have $20,000 to deposit and want different amounts accessible at different stages. Instead of dumping it all into one 12-month CD, you could split it into smaller amounts:

• $5,000 in a 3-month CD
• $5,000 in a 6-month CD
• $5,000 in a 9-month CD
• $5,000 in a 12-month CD

This way, money frees up every few months. You'll get a steady rotation of access and returns, with less risk of needing to break a long-term CD early.

Sometimes, early CD withdrawals are unavoidable. But you can definitely take steps to lower your risk of getting hit with a penalty for accessing your cash before you're supposed to.

Looking for a CD that fits your savings goals? Check out our top-rated CDs with competitive rates and flexible terms.